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Risk Aversion, Liquidity, and Endogenous Short Horizons

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  • Holden, Craig W
  • Subrahmanyam, Avanidhar

Abstract

We analyze a competitive model in which different information signals get reflected in value at different points in time. If investors are sufficiently risk averse, we obtain an equilibrium in which all investors focus exclusively on the short term. In addition, we show that increasing the variance of informationless trading increases market depth but causes a greater proportion of investors to focus on the short-term signal, which decreases the informativeness of prices about the long run. Finally, we also explore parameter spaces under which long-term informed agents wish to voluntarily disclose their information. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Bibliographic Info

Article provided by Oxford University Press for Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 9 (1996)
Issue (Month): 2 ()
Pages: 691-722
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Handle: RePEc:oup:rfinst:v:9:y:1996:i:2:p:691-722

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Cited by:
  1. SHerrill Shaffer, 2008. "Strategic Risk Aversion," CAMA Working Papers 2008-25, Australian National University, Centre for Applied Macroeconomic Analysis.
  2. Marc-Andreas Muendler, 2005. "Rational Information Choice in Financial Market Equilibrium," CESifo Working Paper Series 1436, CESifo Group Munich.
  3. Casamatta, Catherine & Pouget, Sébastien, 2009. "Fund Managers' Contracts and Short-Termism," TSE Working Papers 09-042, Toulouse School of Economics (TSE).
  4. Matthew Spiegel, 1997. "Closed-End Fund Discounts in a Rational Agent Economy," Finance 9712002, EconWPA.
  5. Casamatta, Catherine & Pouget, Sébastien, 2009. "Fund Managers' Contracts and Financial Markets' Short-Termism," IDEI Working Papers 553, Institut d'Économie Industrielle (IDEI), Toulouse, revised Feb 2011.

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